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Short-Term Investors Search for Yield, Brace for Change

Treasurers evaluate their options in light of proposed changes to money fund regulations.

Treasurers face multiple challenges when it comes to short-term investments. Large corporates have oodles of cash, but the returns they’re earning at the short end are minimal. And money market funds, typically one of the main repositories for companies’ short-term cash, could become less attractive for corporates if the Securities and Exchange Commission (SEC) goes through with some of the regulatory changes it has proposed.

A recent survey by PwC suggests that while corporate treasurers are exploring ways to achieve higher returns and prepare for possible regulatory changes, for the most part they continue to take a traditional approach to short-term investing.

“Treasurers are clearly looking for ideas and opportunity for how to get more bang for the buck out of their investment portfolios,” said Peter Frank, a principal at PwC and leader of its Corporate Treasury Solutions practice.

But none of the respondents to the PwC survey rated maximizing return as their primary investment objective. Instead, 86% cited preserving principal as their primary goal, while 13% cited maintaining liquidity. Maximizing return was the third choice for 86% of respondents.

Among the investments permitted by investment policies, money market funds were the most common, cited by 92%, followed by Treasury bills (86%) and term deposits (79%). Some individual securities were on the list, such as commercial paper (72%), agency securities (59%), and corporate bonds (53%). But Frank noted that “policies generally afford a lot more flexibility than companies are actually taking advantage of.” Even if a company’s policy allows it to invest in a certain instrument, “that doesn’t mean that represents a significant percentage of their portfolio,” he said.

In fact, an Association for Financial Professionals survey last year of more than 450 of its members showed that almost three-quarters (74%) of corporate cash was invested in bank deposits, money market funds, and Treasury bills.

SEC on Track to Alter Money Fund Regulations

Last June, the SEC came out with proposals for additional changes in regulations of money market funds. (The agency made an initial round of changes in 2010.) The options include setting up gates and fees that money funds could use to limit withdrawals in times of stress, mandating that funds use a floating net asset value (NAV) instead of the stable $1-a-share NAV they use now, or some combination of the two. The SEC is expected to announce its plans sometime this summer.

Fees and gates would be more disturbing for treasurers than a floating NAV, said Benjamin Campbell, president and CEO of Capital Advisors Group, an investment adviser specializing in institutional cash investments.

“A number of the corporates we’ve talked to have said that if fees and gates were imposed, in one form or another, it would be a non-starter,” Campbell said. “The treasurers are probably a bit more accepting of the NAV float than they would be the fees and gates.

“The utility of money funds will likely be changed, and [treasurers] have to reposition around that,” Campbell said, noting that companies are also dealing with negative interest rates in Europe and a decline in supply. “The number of eligible credits that are A or above has shrunk.”

Companies are responding by re-assessing their options, he said. “We see companies evaluating separate accounts and setting up the infrastructure for separate accounts. They’re still in money funds, but they did do the paperwork for separate accounts so they had the option available to them.

“I just think the market does not want to be caught flat-footed,” Campbell added. “When that headline does come out and the treasurer pops his head in the office of the [assistant treasurer] and says ‘What are our plans?’ it will already have been somewhat vetted.”

Some companies are considering buying money market securities directly, rather than investing through money funds, “with the object of getting a little more yield and in anticipation of changes around money fund regulations,” said Frank. “I don’t think it’s a massive trend.”

Two triggers that could lead to changes in companies’ short-term investing would be changes in money fund regulations and a change in companies’ tolerance for investment risk, said Frank, pictured at left.

If regulatory changes make money market funds less attractive, “that would force companies into a mode of operation where they would need to be investing more directly on their own behalf in individual securities rather than through a fund,” Frank said, but he noted that he doesn’t see this as a likely scenario.

“Except for the largest of corporates, most companies wouldn’t really have the internal resources to do the investment analysis, credit analysis, and risk analysis they would want to do to be comfortable making these decisions on an ongoing basis, and probably would be looking more toward accounts” managed by external advisers, he added.

“The other trend that I think would trigger greater use of external advisers would be a significant change in risk tolerance of companies for investment risk,” Frank said. “If companies start to step out on the term horizon and take more risk, or step out on the credit spectrum and take more credit risk, almost by necessity companies with below–$5 billion portfolios would have to use investment managers to do that.”

Honeywell Makes Changes

Some companies are doing more than evaluating their options.

At the New York Cash Exchange this spring, Honeywell’s assistant treasurer talked about changes his company is making in its short-term investments. Honeywell is now buying commercial paper (CP) directly, assistant treasurer Jim Colby said, although it only buys that of non-financial issuers. And it is doing an RFP for separately managed accounts.

Colby said the company’s cash balances “are skewed toward banks,” and he cited the company’s interest in diversifying its short-term holdings. “In the crisis, numerous banks had to get bailed out,” he said, but noted that “no Tier 1 or Tier 2 CP issuers defaulted.”

In addition to limiting itself to non-financial issuers, Honeywell buys only commercial paper maturing in two months or less to avoid LBO risk and event risk, he said.

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